Why should surplus countries only be punished? After all, you can't run a surplus without someone else running a deficit. Wouldn't it make a whole lot more sense to nudge countries towards equilibrium per se? The extend of the (dis-)incentives should be proportional to per-capita GDP, so as to cut developing countries some more slack to develop their economies. This would also circumvent the issue of having to reassign a special status of each developing country as they develop - political bickering and all included.

or indeed, much better to dispense with the fiction of monetary policy altogether, and simply allow the UN to set up a central bank that is tasked with issuing a global currency at a rate equal to the global rate of economic growth...

Milton Friedman was right all along, but economists will not follow his advice because it will throw a lot of them out of their cushy jobs.

Just one reflection on the issue. WTO seems to be quite effective international organisation that imposes penalties. Why it could not be the case with a similar organisation that sets the rules on currencies?

If you want to improve global monetary system just stabilize it... It will evolve into better one sooner or later.... US dollar makes the whole system more stable as far as I am concern... and I wouldn't be able to imagine chinise Yuan, japanese Yen or korean Won as a stady currencies for international trade... So why on Earth one thinks that rejecting US dollar would make it any difference... if something works just leve it alone... do not mess up... monetary system's revolution of today would devour its tomorrow's children

Yes, there is a better way to organize the world's currencies.

The answer isn't a global currency, it is an independent (from any currency scale) global price scale related to all currencies through conversion rates, an idea launched by http://twitter.com/nobeleconomics and explained in this article: http://tinyurl.com/2725adu

Such innovation is intended to reduce monetary and currency manipulation impacts on the real side of the economy by placing a conversion rate between real relative prices and currencies. For accomplishing that, it is suggested the study of using an independent-from-any-currency price scale to express prices and variable conversion rates to relate the independent scale to any currency, mainly the local currency for each market.

The UN itself could set an independent price scale like that.

The UN itself could set an independent price scale like that... What are you talking about.... the UN is not able to sort out its own problems and you suggest that it might set a price scale ... don't you think it is quite odd?

To answer my own question:

Only surplus countries *can* be punished effectively, so long as the only way to punish a country is through money going everybody else. If a country has a deficit and has to pay a fine, you make the problem worse, not better.

But that means that there will be an advantage to pursue a deficit strategy, as it leaves you in a much more flexible position, thus forcing somebody else into being punished for running a surplus.

In other words: If you try to fairly punish surpluses *or* deficits by some generalized kind of money-fine, you're doing it wrong. You will have to find another dimension (something other than money) in your course of action if you want to ensure fairness in the evaluation of currencies.

The time has truly come for the world’s currencies to reorganize to boost the global economy. Today economically powerful nations like China and United States have problems with some aspect of the global interaction of monetary actions. If you ask me I think all the problems go back to the US dollar. Given that United States only accounts for only a quarter of the global GDP the role of the dollar in exchanges and transactions creates an unbalanced system. With a global system dependent on the one currency the whole world gets tied to that nation’s domestic policies and problems. Also the increasing amount of global reserves and emerging economies creates a problem. The dollar in this case plays an even bigger role since it’s the dominant reserve currency. At the end it all comes down to one currency having too much influence in the world. If the dollar would share the weight of the world currencies many of these problems if not all would perish.

To tp1024

May the other dimension be the independent-from-currencies global price scale I explained in my previous comment?

If you want to improve the global monetary system, we must learn about the what the dollars do. The dollars are pegged with oil. The oil just make the dollars more credit. So the dollar can be the International currency reserve. If the nation can not control the oil resources to make the currency credit, in my opinion, the nation should peg their national currency with gold, this measure can help the naiton to stabilize the currency value and confirm the purchasing power of the currency.

No global government… means no global central bank, which means no global currency....and this is the irony that we are searching for the mirage of international financial world sans any political union......see EU and the whole analogy will become all the more clear.....

@Vitro Ol: The independent price scale is a neat idea, but it's been around for a while: Marx summarized it in his labor theory of value. However, there is no objective way to classify the intrinsic value of one good/commodity/currency into a single, universally applicable scale (as different goods have different values to different people, depending on tastes), which is why Marx's value theory could not be made to work.

@ economical aetiology: You are quite right, a global currency regime cannot be made to work, unless there is a governance regime in place to swing carrot and stick.
But if we look at lessons from the past, we might get some idea of how to rig a better arrangement:
The Plaza Accord (and to some extent the G6 Bonn I&II agreements) was the only instance when macroeconomic coordination actually worked, at least for a short time. Why? Because all actors, surplus and deficit countries had a clear benefit, a stable international monetary system, and the US was temporarily weakened so as to be made agreeable to an international agreement.
A monetary system under G20/IMF aegis is possible, but only when the need for it becomes so dire, that all actors involved begin to feel the pain. I think it may take a while longer before the US is in sufficient need for international cooperation, so as to play ball with the rest of the world. Lets hope world trade survives until that point...

the basic question to me is do we really need something to organise the world's currencies. Just let it happen.

To Stolicus

Thank you. I agree that things have different values according to place and time. The idea of an independent price scale, however, doesn't exclude such differences. One thing may cost 10 units of price in NY and 9 units of price in London, due to local market conditions. But the independent scale tends to separate what is due to real market conditions from what is due to monetary manipulation.

Read article: http://tinyurl.com/2725adu

there needs to a balanced currency exchange rates mechanism needed to avoid any future economic crisis around the world. Be it a new form of currency exchange mechanism including SDR or any other to counter such global crisis. But I am not sure if SDR alone will be able to support such monetory policy that may also undermine the very problem that the world if facing.

The solution should and ought to be as such that all surplus holding foriegn currency countries need to revalue theit currency including the Yuan to give a much needed boost to the global econony. Perhaps policy makers need to look beyond Bretton woods 2 to counter these kind of viciuos cycle of global economic downturn from happening.

I remember when the COMECON countries (does anybody remember?) needed a common currency to facilitate their fast increasing trade, they invented the so called "covertible rouble". It was a virtual money - basically some exchange formulae between the weighted basket of national currencies like Soviet rouble, Polish zloty, East-German mark and Hungarian forint. Soon became clear that - in order to preserve the weighted basket of currencies - fixed exchange formulae works better with a clear functional differentiation in production and consumption. Thus buses were made by Hungarians, radio sets by Bulgarians, steel and heavy machinery was Soviet, agricultural machinery East-German, cars and rail Czech.
Strange enough, the system worked well until the weighted currency basket and the exchange formulae became outdated by the different inner dynamics of the national economies. In the 80s the basket has become so outdated that competitive state companies (in every member state) tried to avoid the rigid system of communist trade and turned their export towards the West.
Anyway, the global currency basket and the virtual reserve currency is a good and feasible idea. The devil is NOT in the theory frame, the devil is in the flexible and permanent updating of the emerging new system.

The Monetary Universe in general, and the Foreign Exchange Universe in particular, are now organized - clustered around the three major Central Banks : The European Central Bank, The Central Bank of China, and the Federal Reserve of the United States. These three "Centers of Gravity" will cause very heavy dislocations in the Financial Universe. It is irreversible. These tremors will have long lasting effect on the Reality in which we will all witness soon enough. There is no way out. These tremors will come.

Any deal would require that the parties act in good faith. Given China's long history of acting in bad faith when it comes to its WTO commitments, how could anyone trust anything they would agree to, and how could any agreement be possible in this context?

It would be really interesting to see a graph of the Euro Zone countries. It's clear that economies like Germany and France are supporting the economies of the other Euro zone countries... And again, we see the US supporting a ficticious economy, the whole world is doing it, because we need their consumption.

Every country has the same currency.